To answer this question requires an insight into the mind of the elusive small investor. Three years ago this mysterious creature invested in Sunku Auto. Today his investment has lost half its value. Is she likely to think that she has been served right: that the company has performed as its name promised? Or her investment in Lunar Diamonds, which has lost a quarter of its value: would she think that the company's prospectus was an invitation to lunacy, and that she simply failed to read it properly? Or her investment in Bee-Am Chemicals, which has lost three-quarters of its value: did she take the chemical bit of the name too seriously, and miss the grammar of philosophy that the company was really dishing out? At least she did not go on for the completely wrong grammar of IB Industries, otherwise she would have lost 86 per cent of her money. Or of Spenta Finance, which is 77 per cent below par. And she read the message of Arpan Industries right: she was being asked to give away her money, and she is lucky she can still sell its shares at half price.
Let us leave these instances where deep thinking was required to get the message: sheer carelessness is also costly. An investor in Global Industries has lost only half his money. But suppose he subscribed to Global Finance by mistake; then he has lost 60 per cent of his money. Maybe he was cautious and invested in Global Finance and Securities; for his pains he has lost 79 per cent of his money. And if he was really cautious and invested in Global Security, he has lost 81 per cent of his money. Admirers of Bajaj Auto who made small mistakes must have lost 40 per cent of their investment in Bajaj Hirers, 78 per cent of their investment in Bajaj Steel, and 87 per cent of their investment in Bajaj Plastics.
Holy scrips have been particularly treacherous. Jains must be ruing the fact that Arihant Industries is 61 per cent, Arihant Cotsyn 70 per cent, Arihant Foundries 84 per cent, and Arihant Tournes a whopping 92 per cent below par. Even Shatrunjay Extrusions is 75 per cent down. But the Jains should not think that God has been particularly unkind to them. Those who began their careers as investors with Shree Ganesh have lost three-quarters of their money. They are luckier than investors in Siddhi Vinayak, who have lost 84 per cent of their money. Those who listened to Lakshmi and invested in Shree Vaani Sugar have lost 85 per cent of their money. Those who were overcome by the Ayodhya fervour and invested in Shriram Asset Management have lost four-fifths of their money. Trust in God does not dispense to get the spelling right: Brindavan Garments lost 50 per cent, Vrundawan Agro lost 73 per cent, while Vrundavan Securities lost a mere 5 per cent of its par value.
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Thus the mythical small investor will have learnt by now that she can never get the name right. But is it better to let the experts choose the name? Would she have been better off investing in a mutual fund? The fund that has done worst is Taurus Starshare, whose market price is 71 per cent below par; but its NAV is only 52 per cent down. Apple Goldshare is 70 per cent below par, but its NAV is only 20 per cent below par. Centurion Quantum Fund, started at about the same time, is 62 per cent below par; but its NAV is only 33 per cent below par. All the other funds started in 1993 and 1994 have done better: their market prices are 20-55 per cent down, and their NAVs are much closer to par. In other words, the small investor who invested at the worst time could not have done as badly in any mutual fund as she could have done on investment in new and obscure companies. In this sense, investment in a fund reduces the downside risk. But the market realisation of a closed mutual fund is bound to be lower than its
net asset value, since some of the shares will be illiquid; and clearly, there are enormous differences in the quality of management of different mutual funds. The quality of management does not depend upon the issuer, but upon the fund's investment manager and the funds at his command. Amongst Indian funds, some are better managed than others. But the quality of managers is well known in the investment community, and good managers are frequently bought off by competing funds. Hence, the past performance of a fund is not a good indicator of its future performance.
If the performance of a fund can fluctuate over time just because it gets or loses a good investment manager, it would be foolish to stick to a fund for all times. Hence -- especially in a volatile market such as India's, open-ended funds are distinctly preferable to close-ended funds. Poorly managed funds can quickly shrink their asset base; then their costs of management per rupee of assets go up, and they do even worse. So the rewards and costs of management are greater in open market funds, and hence their quality of management is also better. Of the open-ended funds, Apple Platinum and Centurion are both almost 50 per cent below par; Kothari Pioneer Plus is 35 per cent below par. The rest are either at a premium or at small discounts -- of less than 20 per cent. Even the open-ended funds started at the peak of the cycle in 1993 and 1994 are much better priced than close-ended funds. Thus a small inexpert investor is better off in mutual funds than investing on her own; and
amongst funds she should go in only for open-ended funds.
It is interesting that all open-ended funds trading at big discounts have a heavy upfront load; one pays 6 per cent and more on purchase. In other words, the management of these funds would have got 6 per cent of its value on subscription itself; and it would make another 6 per cent all the time on turnover. This is all reward unrelated to performance; and it is apparently associated with poorer performance. There is some evidence that no-load funds are better managed.
The small investor who invested in the shares I mentioned earlier may have decided never to invest in the stock market again. She may also have read my view that given the current interest rates, share prices are too high. But if she does not believe me, she could do worse than invest in open-ended, no-load growth funds.